Strike One: The Economic Causes and Effects of British Labor Actions
For the first time since its founding, the Royal College of Nursing, a labor union for British nurses, is going on strike to demand a pay raise. They are part of a much larger wave of strikes beginning in industries across the United Kingdom. What is behind this wave of labor actions? What effect will it have on the already inflationary British economy?
Inflationary Strain
For many of the unions, the troubles began during the COVID-19 pandemic. Nurses in particular had to deal with strenuous working conditions during the public health emergency. As many nurses chose to leave, those that remained were forced to work long hours. After the worst effects of the pandemic began to subside, workers next began to deal with inflation. First, there were the supply chain bottlenecks in key goods such as semiconductors. The Russo-Ukrainian War also played a role; as Ukraine and Russia are major exporters of grain and oil, respectively, the restrictions of their exports during the war raised the prices of fuel and food.
When inflation begins, rational consumers usually begin to demand higher wages and purchase goods before prices rise any further. This pattern, however, only increases inflationary patterns. As consumer demand for goods increases, prices are only pushed up further. And events specific to the UK only made things worse. When Liz Truss became prime minister of the United Kingdom in September 2022, she and her Chancellor of the Exchequer Kwasi Kwarteng unveiled a mini-budget to the UK parliament. The budget included income tax cuts, especially for higher earners as Ms. Truss had promised to lower taxes during her campaign to be prime minister.
The problem with this mini-budget, however, was that tax cuts during an inflationary period only worsened the problem. Tax cuts are an expansionary monetary policy, putting more income in the hands of consumers when demand for goods is already increasing. As a country’s currency becomes more inflationary, investors holding the currency exchange it in favor of other, more stable currencies. Investors in foreign exchange, anticipating the more inflationary British pound, sold it on the markets. To make matters worse, a falling currency value makes it more expensive to import foreign goods, a situation which only worsened the plight of British households struggling with the cost of living.
Strikes as a Solution
With all this inflationary pressure, nurses, airport workers, railway workers, and others have decided to go on strike. They are demanding larger increases in pay to keep up with rises in inflation. The problem for British public sector workers—like nurses, who work for the government-run National Health Service—is that the current prime minister, Rishi Sunak, is occupied with trying to reassure financial markets by compensating for the deficit left by Ms. Truss’s mini-budget. To do so, Sunak’s Chancellor of the Exchequer, Jeremy Hunt, has produced a budget with increased taxes and decreased spending. Significant salary increases for public sector workers is anathema to this goal; indeed, the British government has signaled no willingness to meet the workers’ demands.
Should British public sector workers receive pay raises, however, it would only be a temporary solution. Absent other measures, inflation in the UK will increase beyond the workers’ elevated salaries. In fact, given the positive feedback loop between wages and prices mentioned previously, a pay raise may inadvertently perpetuate inflation in the United Kingdom. The broader issue is lowering the inflation rate in the British economy; doing so is the only long-term solution. The Bank of England and other central banks around the world are currently working to lower inflation by raising interest rates and making it more expensive to borrow money for consumers or businesses to spend.
In the short term, however, the strikes will likely cause disruptions to the daily workings of the British economy. Their exact effects, however, will depend on the specific industry. Railways, for example, are not widely used in Britain, so the economic effects of rail strikes will likely be limited. The striking nurses and other National Health Service workers, however, could be more problematic. Although economic disruptions usually bode poorly for financial markets, the main British stock index, the Financial Times Stock Exchange 100 (or FTSE 100), has held its value comparatively well amidst turbulent economic conditions and thus is not a bad option for prospective investors. However, whether the government and the workers come to an agreement—and the high inflation underlying the dispute is lowered—will only be determined by time.